Pricing can help solve nitrogen problem

24/11/21

Long-term structural solution

Pricing is in theory an effective and efficient policy instrument for reducing harmful nitrogen emissions. That is the conclusion of PwC's report 'Does pricing offer a structural solution to the nitrogen problem?’ The report presents pricing, especially in the European context, as a possible part of the structural approach to nitrogen. It points out that more attention is needed for shaping the long-term nitrogen policy.

Pricing of nitrogen is effective and efficient

Although pricing is not currently used to address Nitrogen, it is an instrument that can effectively and efficiently reduce nitrogen emissions. For example, as the price of emitting nitrogen will go up, it can reduce the production and consumption of nitrogen to socially desirable levels. The "market" determines the distribution of nitrogen reduction. Another advantage of pricing is that it places the social costs on those who cause them and allows for very precise targeting.

Uncertainty about effectiveness of current nitrogen approach

Currently, the Dutch government is working to reduce nitrogen emissions based on the measures in the "Nitrogen Act” (Stikstofwet). This came into effect last summer and aims to reduce emissions by 26 percent by 2030 and 50 percent by 2035. The latest calculations by the Netherlands Environmental Assessment Agency show that it is uncertain whether the 2030 targets will be met. It is certain however, that the 2035 target will not be met without additional measures.

Pricing at European level is strongly preferred

To shape the structural nitrogen policy, the report draws a parallel with the European Emissions Trading System (EU ETS). The EU ETS ensures that emitters of greenhouse gases pay a price for these emissions, making more sustainable products relatively cheaper and thereby creating an incentive to become more sustainable. “Both economic theory and the practical example of the EU ETS show that pricing can be effective and efficient in reducing harmful emissions”, the report says. Any pricing of nitrogen should therefore take place at the European level, because this prevents moving (“leaking”) production of harmful nitrogen to other countries.

High social costs of nitrogen emissions

There are different types of nitrogen emissions. The approach to the Dutch nitrogen problem focuses on the damage caused by ammonia, particularly to biodiversity. Another type, nitrogen oxides, is mainly harmful to health. This is why the social costs are so high. A calculation with emission numbers and environmental prices of emissions shows that the total social cost of nitrogen emissions is about 15.3 billion euros in the Netherlands. The same calculation shows that the total annual social cost of CO₂ emissions in the Netherlands is 'only' 12.1 billion euros.

Pricing is contribution to long-term solution

The report sees pricing of nitrogen emissions as a part of a long-term solution to the nitrogen problem. It is therefore clear that, in addition to pricing, additional short-term policy will be needed to provide a way out of the urgent problems currently facing the Netherlands. PwC advises the government to investigate the possibilities of (European) pricing further. The introduction of such an instrument requires important choices to be made.

Importance of additional income policies

The report stresses the importance of additional policy to create support and counteract the undesirable side effects of pricing. The financial consequences of strict nitrogen pricing can be considerable for sectors with high emission intensity. Therefore, the successful introduction of pricing should ideally be accompanied by sufficient additional income policy to achieve a careful transition. Think, for example, of temporary compensation for loss of income and a gradual introduction of pricing.'